Is Turnaround now at a turnaround?

Commentary: Volatile letter may be fluctuating upward

PeterBrimelow

The Turnaround Letter, edited by George Putnam, is the third-best performer among those letters tracked by the Hulbert Financial Digest over the last 20 years, up 11.9% annualized.

But its strategy of always being fully invested in distressed stocks seems to hit occasional potholes. It may be climbing out of another one right now.

Over the year to date through June, the Turnaround Letter is up 10.3% by Hulbert Financial Digest count vs. 9.22% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. But over the past 12 months, Turnaround is down 7.41% vs. a 3.96% gain for the dividend-reinvested Wilshire 5000.

In contrast, over the past three years, the letter is up 21.59% annualized vs. 16.65% annualized for the total return Wilshire 5000.

But over the past five years, Turnaround was down an annualized 2.11% vs. 0.43% annualized for the total return Wilshire 5000.

This, of course, includes the Crash of 2008. Turnaround lost a starting 55.38% that year, vs. a mere 37.23% for the total return Wilshire. But it has recovered.

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Over the past ten years, Turnaround was up an annualized 10.52% vs. 6.04% annualized for the total return Wilshire. Over the past 15 years, Turnaround was up 8.86% annualized vs. 5.21% annualized for the total return Wilshire.

Those edges compound dramatically.

Turnaround maintains a comprehensive data base on public companies in or emerging from bankruptcy, a major resource for investors in its own right. (See website) This strategy naturally leads it into volatile areas.

But it’s volatile both ways: It had two stellar years in 2009 and 2010, up 75.62% and 30.41%, respectively. (See Nov. 2, 2009, column.)

Although editor Putnam does not attempt to time the market, he does have opinions on it. He comments in his most recent issue: “We are still optimistic, and we see the S&P 500 Index
SPX, -0.23%
rising by at least a few more points between now and the end of the year.”

He adds: “If we see solid evidence that Europe really is making progress to solve its problems, the stock market could move up quite strongly in the second half. Many investors are currently sitting on the sidelines. If these investors begin to come back into the equity markets, it would be very positive for stocks.”

Turnaround’s suggested way of playing the European crisis: Buy high-yielding stocks of Europe-based multinationals. Examples: AstraZeneca PLC
AZN, +0.15%
which was yielding 8.7% when Turnaround’s latest issue was published in early July; and STMicroelectronics N.V.
STM, +0.13%
which was yielding 6.3%.

Turnaround reports that “there are no obvious trends in the types of public companies going bankrupt” this year. It says frankly that “until we get a few more big Chapter 11 filings, we don’t see much in the way of great bankruptcy investing opportunities.”

Turnaround expects, however, a pick-up in the bankruptcy rate. Its conclusion: “We recommend that investors be patient because we expect better opportunities down the road.”

Turnaround’s Small-Cap portfolio is its top-performer. Its July issue recommended one further small-cap purchase: Exide Technologies
XIDE
which has been through two restructurings in the last 10 years.

Turnaround writes: “This is not a glamorous business, and it will never be transformed into one. But the company is taking a series of basic, gritty steps to create shareholder value.”

And Turnaround notes: “Despite these improvements, Exide’s valuation remains cheap compared to its competitors. If management can’t get the stock price up, we expect it to face substantial pressure to sell the company.”

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